Sunday, July 28, 2013

Shares Investment 2013 Stock Picks: Second Quarter Review

There is no doubt many of us would prefer to turn our backs on the April to June period. One moment, things were looking so rosy and the next thing you know, the positive momentum just evaporated. On the flip side, does this correction open up any opportunity? As we round up how the stock picks by market experts and the Shares Investment team fare over the second quarter, we would be presenting new picks that could potentially do well over the next three months.

Let us begin with the global happenings in the second quarter of this year. The start of the three-month period saw newly appointed Bank of Japan governor Haruhiko Kuroda made public its US$1.4 trillion stimulus programme. Monetary policy also remained accommodative in the Eurozone as the European Central Bank reduced borrowing costs to a record low 0.5 percent.

Unfortunately, things took an ugly turn. The hint by Federal Reserve chairman Ben Bernanke that the Fed could start to slow down the pace of asset purchases had equities going haywire. Concerns over economic growth and tighter liquidity in China weighed on sentiments as well.

Very much influenced by external forces, the Straits Times Index went into negative territory in the second quarter, shedding 4.8 percent. The fall meant that gains in the first quarter were totally wiped out. Taking reference from the stock performance table, most of the stock picks were adversely impacted. Still, there were some outperformers. Read on to find out which stocks are keepers as we get insights from the market experts through an exclusive interview!

Second Quarter Performance Of Stock Picks

Source: Compiled From Information On The Singapore Exchange

Ho Bee InvestmentWith investor chasing after yields, Ho Bee Investment may be interested in raising funds by spinning off a REIT (Real Estate Investment Trust). The company can also potentially reap strong gains from the completion of Metropolis. Chart wise, prices remain on an uptrend and had in June rebounded from that trendline. The 40 SMA (simple moving average) and 100 SMA are still sloping up. The resistance is around $2.20 (which was the high in May 2013) while the support is at $1.90 region.

Yanlord Land GroupChart wise, Yanlord Land Group’s uptrend has broken below the upward trendline. In May 2013, the CCI (commodity channel index) was oversold and rebounded from the 40 SMA. However, this rebound was short-lived as the price resumed downward towards the 100 SMA. Currently, we are at a very critical time for Yanlord. The downward movement is slowing down and we had a bullish candle two weeks ago followed by a Doji candlestick. I am looking for rebound at $1.40 if any rebound takes place.

United EnvirotechUnited Envirotech won a project valued at Rmb200 million ($40 million) in March 2013. New York-listed KKR, a leading global investment firm, is investing a further US$40 million in it. For the full year ended 31 March 2013, United Envirotech’s revenue and earnings jumped 116.9 percent and 196.2 percent respectively. United Envirotech remains on an uptrend despite short-term profit taking along the way. More importantly, the stock did not go parabolic in the last leg. The 20, 40 and 100 SMA are all sloping up. The resistance is at $1.00 and the support is at $0.84.

Sembcorp MarineThough rig building activities have been lacklustre of late, one catalytic event for the oil and gas industry players could be the rising oil prices. In my opinion, Sembcorp Marine, after going through a long consolidation phase, could advance to break its 250-day moving average to test the $4.86 level. The support level for this stock is at $4.21.

Vard HoldingsSince April 2012, shares of Vard Holdings have been on a downtrend and now reside in the oversold region. In terms of financial performance, while its business operation in Brazil is incurring losses, other geographical segments which the company is present in do not face the same situation as they remain profitable. I believe the price at which the share is trading now is reasonable considering that it is at record low levels. The support and resistance for this stock are at $0.79 and $1.205 respectively.

Pan-United Corporation The company’s basic building resources as well as port and logistics divisions have been faring well. Another aspect that caught my attention was its attractive dividend payouts. Should the stock be able to break its long-term resistance level of $1.00, it could go on to test $1.40 with the support level at $0.80.

Now that you heard what the experts have to say, we are shifting the focus to our own picks. In the face of renewed uncertainty about the timing and scale of a quantitative easing withdrawal, volatility may remain the flavour of the stock market. As such, we are going for quality defensive plays as a replacement for AusGroup which is facing headwinds in the form of slower orderbook replenishment, Karara Mining’s non-payment and slowing Australia’s resource sector.

Swiber Holdings

Swiber Holdings was the best performer among our three stock picks, jumping 6.7 percent during the period under review to close at $0.715. Remarkably, Swiber rose 11.3 percent after the group announced a rise in first quarter profit (up 104 percent) and revenue (up 59.3 percent), mainly contributed by further inroads into Latin America and higher share of profit from associates and joint ventures. As at 31 May 2013, Swiber’s order book stood at approximately US$1.1 billion while cash and cash equivalents jumped US$41.7 million higher to US$155.8 million.

Eyeing Deepwater MarketSwiber’s plan to grab a share in lucrative niches of oilfield services market seems to be an attractive investment and hold long-term promise for investors. Notably, as demand for energy continues to rise, the move into deepwater market would be viewed as a good opportunity for the firm to develop the division into another strong pillar of growth.

Earlier in May, the International Oil & Gas Newspaper Upstream cited that Swiber plans to shell out US$500 million in deepwater offshore vessel. Specifically, the firm is reportedly bidding on a contract from Mexican state-owned petroleum company PEMEX to deliver and install four Ayatsil platforms. The heavy-lift contractors such as Saipem and Heerema are among the interested bidders for the contract.

High Indebtedness; Upside PotentialDespite the fact that Swiber’s gross profit margin was lower at 16.1 percent in 1Q13 compared to 19.8 percent in 1Q12, the figure was still within the firm’s guidance of 15 to 20 percent in general. However, investors are advised to pay heed to Swiber’s high bank borrowings and issuance of debt securities which would eventually eat into the firm’s bottom line. Evidently, Swiber’s administrative expenses and finance costs in 1Q13 jumped 6.3 percent and 48.6 percent year-on-year to US$14.7 million and US$9.3 million respectively.

It is estimated by Maybank that Swiber will secure a total of US$1.2 billion new contract wins this year. Given that Swiber has not announced any new contract wins since February 2013, and that its year-to-date order stands at only US$153 million, the focus to watch for from now, therefore, will be its ability to secure further deals. On a positive note though, OCBC Investment sees a 19 percent upside potential despite the group’s share price jumping more than 17 percent since its results release in mid-May.

Perennial China Retail Trust

Although the share price of Perennial China Retail Trust (PCRT) has not quite been up to our expectations (down 7.6 percent) during the period under review, an increase in income available for distribution did come at the right time in soothing some worried unit-holders. For the quarter ended 31 March 2013, PCRT’s available distribution per unit jumped 0.01 cent higher to 0.95 cents, translating into an annualised distribution yield of 6.1 percent.

Announced in May, the quarter’s highlight was the securing of two master leases at Shenyang Red Star Macalline Furniture Mall. Particularly, the master leases with Guangcai International Investment Group will see the tenant occupy about 33 percent of the mall’s total net floor area (NLA). Coupled with the master lease to Red Star Macalline furniture operator, who currently occupies about 60 percent of the mall’s NLA at the East Wing, the mall’s overall occupancy will reach about 93 percent.

Increasing Occupancy Rates In Foshan And Chengdu Apart from the malls in Shengyang, PCRT’s malls in other second-tier cities such as Chengdu (Perennial Qingyang Mall) and FoShan (Perennial Jihua Mall) have also steadily gained traction, with occupancy rate reaching 77 percent and 63 percent respectively. The former is on track to commence operations in 4Q13 to 1Q14, while the latter will commence operations in 3Q13 with occupancy rate targeting to be more than 90 percent.

Fears Of Interest Rate Hike And Slowing China Economic Growth?Not spared from the QE phase-out fears, the FTSE ST Real Estate Investment Trust (S-REIT) Index declined 11 percent from an almost six-year high in May. While we understand that higher rate will result in higher borrowing costs and that REIT’s dividends will look less attractive compared with the other high-yielding investment, we believe that the knee-jerk reaction seen in the S-REITs’ share price is unwarranted simply because the recovery in the US economy would not be fast enough to prompt a spike in interest rates. Furthermore, the sector has outstripped broader equities since June (up 3.7 percent) as the rate panic started to dwindle.

In addition, China’s retail industry remains a very attractive prospect as the country vowed to boost domestic consumption to counter slow economic as a driver of the economy. Not to mention, China’s total retail sales for the first half of 2013 managed to jump 12.7 percent to Rmb11.1 trillion, despite the country’s weaker economic growth.

Eu Yan Sang International

The business of Eu Yan Sang International strikes us as one that offers stability and sustainability. Looking at the financial performances of this global leading integrative healthcare and wellness firm would reveal that the company has been seeing new highs in its revenue every year for the past decade or so. Gross margins were also stable in the range of 50 to 51 percent for the past five years. Judging from its latest financial results for the nine months ended 31 March, the trend seems intact. Looking ahead, business activities are expected to be buoyant, underpinned by rising health consciousness among consumers.

Greater Economies Of ScaleThe company is further fortifying its profit margins. In May, the firm took steps to strengthen its supply chain. The company entered into a 50:50 joint venture with Chengdu-based Sichuan Neautus Traditional Chinese Medicine Company with the aim of improving the sustainability of sourcing for high-grade raw materials. This would eventually bring raw material costs down. With additional help from its upcoming factory in Hong Kong, Eu Yan Sang is expected to see margin improvements.

Turnaround In AustraliaThere may be signs of life in its Australian business. The region posted its fourth consecutive quarter-on-quarter sales growth since it was acquired by Eu Yan Sang. This was, to a large extent, due to Eu Yan Sang increasing the number of self-operated stores while reducing the franchised stores. Based on CIMB’s estimates, the Australian business has been recording losses of $2 million to $3 million per quarter in FY13. However, it noted that “such losses have been diminishing and [the company’s] management expects further improvements in the coming quarters”. Should things take a turn for the better for good, this would mean that the company is doing away with one of the main drags.

It may come as a surprise that some investors are actually glad to see the recent correction. What it likely brings are good entry opportunities into fundamentally sound firms whose shares were deemed too expensive previously. As we step into the second half of the year, it might be a good idea to turn the volatility tide in your favour.

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Disclaimer

Please DON'T treat the posts here as a recommendation. Please do your own research to verify the contents and make your own investment decisions. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.